INDEPENDENT LEARNING #7

1. What is risk aversion? 

 Risk aversion refers to an individual who prioritizes the preservation of having lower
returns or chooses alternatives thar are with less interest than choosing high returns
with hesitant risks. 

2. Explain the risk return trade-off. 

 Risk return trade-off is a concept that when a risk increases, the return level to be
earned from an investment should also increase, which means that the investors
would not possibly pay for the assets with low-risk levels.

3. What are the major sources of risk? Explain each major source of risk. 
 According to Brown and Reilly (2014), the major sources of risks are: 

1. Business Risk that refers to anything that threatens the organization or company’s
ability to attain its financial goals and objectives.  
2. Financial Risk refers to a company’s ability to manage its debts and financial
leverage and is also the possibilities of losing on a business venture. 
3. Liquidity Risk it refers to the lack of security of an asset within its company, and
it also occurs when an investor or institutions cannot meet its debt obligations. 
4. Exchange Rate Risk a risk that is also called currency risk which changes the
value of an investment that are denominated in a foreign currency. 
Country Risk this refers to the economic, social, and political events of a particular business
environment.